Wind Energy Finance in the United States: Current Practice and Opportunities Paul Schwabe, David Feldman, Jason Fields, and Edward Settle National Renewable Energy Laboratory NREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency & Renewable Energy Operated by the Alliance for Sustainable Energy, LLC This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications. Technical Report NREL/TP-6A20-68227 August 2017 Contract No. DE-AC36-08GO28308 Wind Energy Finance in the United States: Current Practice and Opportunities Paul Schwabe, David Feldman, Jason Fields, and Edward Settle National Renewable Energy Laboratory Prepared under Task No. WE16.3H01 NREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency & Renewable Energy Operated by the Alliance for Sustainable Energy, LLC This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications. National Renewable Energy Laboratory Technical Report 15013 Denver West Parkway NREL/TP-6A20-68227 Golden, CO 80401 August 2017 303-275-3000 • www.nrel.gov Contract No. DE-AC36-08GO28308 NOTICE This report was prepared as an account of work sponsored by an agency of the United States government. 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Acknowledgments This work was supported by the U.S. Department of Energy under Contract No. DE-AC36- 08GO28308 with Alliance for Sustainable Energy, LLC, the Manager and Operator of the National Renewable Energy Laboratory. Funding for the work was provided by the DOE Office of Energy Efficiency and Renewable Energy, Wind and Water Power Technologies Office. We wish to thank the following individuals who reviewed and provided insightful feedback to earlier versions of this report: Audun Botterud, Argonne National Laboratory; Dave James and Christopher Schneider, CoBank; Matt McCabe, Clear Wind; and Lori Bird, Jaquelin Cochran, Jenny Heeter, and Eric Lantz, National Renewable Energy Laboratory. We would like to also thank Karin Haas and Kathryn Ruckman and for their editorial assistance. iii This report is available at no cost from the National Renewable Energy Laboratory at www.nrel.gov/publications List of Acronyms A2e Atmosphere to Electrons DOE Department of Energy DSCR debt service coverage ratio FTR financial transmission rate GW gigawatt IRR Internal Rate of Return IRS Internal Revenue Service ITC investment tax credit kWh kilowatt-hour LCOE levelized cost of energy LLC limited liability company LLP limited liability partnership MACRS modified accelerated cost recovery system MW megawatt MWh megawatt-hour NREL National Renewable Energy Laboratory O&M operations and maintenance PPA power purchase agreement PRUF performance, risk, uncertainty, and finance PTC production tax credit PV photovoltaic RPS renewable portfolio standard SPV special purpose vehicle SAM system advisor model WACC Weighted Average Cost of Capital iv This report is available at no cost from the National Renewable Energy Laboratory at www.nrel.gov/publications Executive Summary In the United States, investment in wind energy has averaged nearly $13.6 billion annually since 2006 with more than $140 billion invested cumulatively over that period (BNEF 2017). This sizable investment activity demonstrates the persistent appeal of wind energy and its increasing role in the U.S electricity generation portfolio. Despite its steady investment levels over the last decade, some investors still consider wind energy as a specialized asset class. Limited familiarity with the asset class both limit the pool of potential investors and drive up costs for investors. This publication provides an overview of the wind project development process, capital sources and financing structures commonly used, and traditional and emerging procurement methods. It also provides a high-level demonstration of how financing rates impact a project’s all-in cost of energy. The goal of the publication is to provide a representative and wide-ranging resource for the wind development and financing processes. Wind energy finance generally comprises three main sources of capital: sponsor equity, tax equity, and debt. The blend and proportion of each of these capital sources in a given project is referred to as the capital structure or capital stack. Each source is discussed briefly below: • Sponsor equity in a project most closely resembles a traditional equity investor and often can be provided by the original developer of the project. The sponsor equity is typically the first investor to suffer losses and the last to receive distributions of profit. Because the sponsor commonly faces the highest risk in the partnership, it will often have the highest return requirements, but is typically a small portion of the overall capital stack. • Tax equity will commit upfront capital to a project in exchange for access to tax credits and tax losses from accelerated depreciation. Because this type of investment requires significant capital and tax capacity for up to ten years, tax equity investors are often large financial entities such as banks and insurance funds. Tax equity investors have several other tax-oriented investment options outside of wind to consider including solar energy as well as affordable housing. • Debt capital is a contractually-arranged loan that must be repaid by the borrower and occurs when the lender has no ownership shares in the company or venture. Debt is generally a lower-risk and lower-cost funding source relative to equity—particularly as compared to sponsor equity. Debt capital providers benefit from additional financing protections such as contractually-fixed payment schedules, preferred repayment positions, access to collateral, and rights to assume control of a defaulting company if necessary. Debt capital may be invested through a variety of different financial mechanisms including a construction loan, a direct loan to the sponsor or developer of the project, or, to a lesser extent, a loan to the project itself. One of the key factors in wind finance is the mechanism by which electricity is sold. Traditionally, power purchase agreements (PPAs) have been used as a contract between energy generators (sellers) and energy “offtakers” (buyers). Offtakers generally include utilities and other load-serving entities; increasingly, however, corporate buyers and financial companies are also serving as offtakers. Wiser and Bolinger (2016) report that around 24% of cumulative installed wind projects have been constructed on a “merchant/quasi-merchant” basis in which they are financed and built with either a partial PPA or without a PPA entirely, instead selling v This report is available at no cost from the National Renewable Energy Laboratory at www.nrel.gov/publications energy into the wholesale spot markets, typically with a pricing hedge contract. In these cases, investors may demand a higher return for the risks attendant to merchant projects, such as unforeseen shortfalls in revenue and resource risk (Wiser and Bolinger 2016). Recently, the various procurement strategies by which corporations have sought to supplement their electricity purchases with wind contracts have included offsite PPAs, virtual PPAs, and other mechanisms. This report also provides a high-level illustrative example of how financing rates can modestly impact a project’s overall cost of energy and, accordingly, its cost competitiveness with other investment alternatives. The financing rates of a wind project reflect the perceived risks by potential investors in a project. These risks can be categorized into three basic risk types. General risks can be attributed to macroeconomic forces and market-wide risks tolerances, which are illustrated in metrics such as benchmark interest rates. There are also wind-industry- specific risks derived from issues like